Cyprus stood on the brink of bankruptcy last night after its parliamentarians voted down a bailout deal that would have taxed ordinary savers.
The decision sets up a showdown with its European creditors who are insisting that the island contributes to its rescue package or risk going bust.
Officials say it is just a matter of weeks before the government runs out of money, leaving it unable to cover civil servants' salaries or welfare payments.
In order to qualify for €10bn (£8.5bn) promised by the International Monetary Fund (IMF), the European Central Bank (ECB) and eurozone finance ministers, Cyprus had to approve the plan.
President Nicos Anastasiades had warned that a "no" vote could lead to financial chaos and an eventual exit from the single currency. Just hours before parliament met to debate the measures, the president had put forward new proposals in an effort to win over MPs.
The new plan would have seen anyone with less than €20,000 (£17,000) in the bank exempt from the tax. The move was a departure from the agreement reached in Brussels over the weekend, which stipulated that all deposits would be charged. But even this amendment was not enough to convince lawmakers, 36 of whom voted against the measures, with the other 19 abstaining.
Cyprus needs as much as €17bn (£14.5bn) to pull back from the brink after its financial sector was hard hit by the crisis in Greece. The troika of the IMF, the ECB and the EU have pledged €10bn, but only if the Cypriots come up with €5.8bn (£4.9bn) themselves. They have also threatened to withdraw ECB emergency funding from two stricken banks, which is key to Cyprus's immediate future. If it disappears, the island's two largest banks will go bust, triggering a fresh crisis that could force Cyprus out of the euro.
Last night the ECB pledged to continue providing funding "within the rules", but given its earlier threats the statement was met with scepticism in financial circles. The Cypriot government faces a tough choice – return to the troika and renegotiate, or attempt to find other sources of finance, possibly from Russia.
Underlining the sense of panic, Britain announced it was sending an RAF plane loaded with €1m (£853,000) to provide emergency loans to British troops, as banks on the island remained closed.
The (MoD) said the RAF flight will provide people with emergency loans in the event that cash machines and debit cards stop working completely.
The Government had re-assured British troops posted to Cyprus that they will be fully compensated for any plans to raid their savings.